Management S Discussion and Analysis For The Six Months Ending June 30, 2010

Transcription

1 Management Discussion and Analysis For the Fiscal Quarter Ended June 30, 2010

2 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and INTRODUCTION Mundoro Capital Inc. (the Company or Mundoro Capital ), is a Canadian based, mineral exploration, development and investment company. Mundoro Mining Inc. ( Mundoro Mining or MMI ) is a wholly owned subsidiary of the Company. The following management s discussion and analysis ( MD&A ), prepared as of August 10, 2010, should be read in conjunction with the unaudited interim Consolidated Financial Statements for June 30, 2010 and June 30, 2009 and the related notes, and MD&A for the year ended December 31, The consolidated financial statements and the related notes have been prepared in accordance with Canadian generally accepted accounting principles. This document has been reviewed by the Audit Committee of the Board of Directors of the Company and has been approved by the Board of Directors. All amounts are expressed in United States dollars unless otherwise indicated. 2. SUMMARY OF ACTIVITIES In the second quarter of 2010, the Company focused on: (i) MMI s efforts to renew the business license for its Chinese joint venture company, Tianli Liaoning Mining Company ( Tianli ), which has been outstanding since August 2005; and (ii) the evaluation of new projects for the Company. MMI is in negotiations with various Chinese and other companies to preferably structure a strategic partnership transaction that could, depending on milestones, result in the sale of the majority of the Maoling Gold Project and MMI to retain a minority interest or a form of participation in the event the Maoling Gold Project is developed in the future. There are no assurances that these negotiations will be successful or that a transaction can be completed. The Company is also evaluating legal alternatives in China; however there is no assurance that the Company will be successful in legal action with the Chinese government. The Company continues to carefully evaluate new resource opportunities at the project level and the corporate level and weigh these opportunities against the value they would create for shareholders and the necessity to conserve cash in order to maintain current activity and future developments. The Company maintains a low share count of 38.3 million shares outstanding and is in a financially strong position with $10,560,531 in cash and no debt on June 30, Considerable effort was made in the second half of 2009 and the first quarter of 2010 to update our earlier understanding of the technical and environmental aspects of the Maoling project as it relates to evolving Chinese government mining and environmental regulations. The effort focused on revising the processing plant circuit, the tailings storage facility and the water management for the Maoling Gold Project. Mundoro completed three key reports: in the fourth quarter of 2009 (i) a report by Ausenco on the use of revised processing plant circuit from that of the 2005 Pre Feasibility Study to now use a combination processing circuit of gravity, flotation and Carbon in Leach ( CIL ) for the Maoling ore; and (ii) a report by Golder to provide revised tailings storage facility design from that of the 2005 Pre Feasibility Study as a result of the revised processing plant circuit; and in January 2010 (iii) a report by Golder and three Chinese design institutes on the environmental considerations for mine development in the Maoling area and how that pertains to Chinese government mining and environmental regulations. In January 2010, the Company delivered to senior officials in the Liaoning government a report titled A Study on Yushi Reservoir Water Source Protection Zoning and Analysis of Impact of Maoling project on Water Source Protection prepared for the Company by three Chinese design institutes. In response to that report in March 2010, Mundoro received a letter from Aidi ( Aidi March 2010 Letter ), suggesting that the parties immediately negotiate to terminate the Maoling Project and liquidate the joint venture company. The reasons cited for the proposed termination and liquidation are that current Chinese environmental and drinking water regulations make it impossible for the joint venture company to conduct mining activities at Maoling. Mundoro does not intend to terminate the joint venture or liquidate the joint venture company. The Company believes the work completed to date by its Chinese and international engineering firms and environmental consultants demonstrates that the project can be developed in a sustainable and responsible manner with no significant impact on the downstream water storage facilities supplying Yingkou City and Dalian City. Mundoro responded to the Aidi March 2010 Letter with a letter dated March 31, 2010 Page 1 of 15

3 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 ( Mundoro March 2010 Letter ) explaining the reasons why Mundoro does not intend to terminate the joint venture or liquidate the joint venture company and presented a proposal for the renewal of Tianli s business license. In July 2010, the Company received a letter from its joint venture partner ( Aidi July 2010 Letter ), which again suggested that the parties immediately terminate the joint venture. The Aidi July 2010 letter is in all material respects similar to the Aidi March 2010 Letter and did not address any of the points raised by the Company in its response to the Aidi March 2010 Letter. Mundoro is in the process of responding to the July 2010 correspondence from Aidi. Mundoro added to the management team a contract Chief Financial Officer for the Company in March Mr. Blacketor is a Certified Public Accountant with over 17 years experience in the mining industry. Most recently, Mr. Blacketor has served as Vice President, Chief Financial Officer and Secretary of Metallica Resources Inc. for 11 years, a company listed for trading on Amex and the TSX. Previous to Metallica, Mr. Blacketor served as Chief Financial Officer of MinCorp Ltd., and held senior management positions with Pincock, Allen & Holt, Inc. and Touche, Ross & Co. Mr. Blacketor holds a Bachelors Degree in Business Administration from Indiana University and a Masters Degree in Business Administration from Colorado State University. 3. PROPERTY OVERVIEW The Company owns a 100% interest in Mundoro Mining Inc., which remains the largest and key asset of Mundoro Capital. Mundoro Mining s sole focus is the Maoling Gold Project ( Maoling ) located in Liaoning Province, China. The Measured, Indicated and Inferred Resources of Maoling (shown in the table below) place it in the category of one of the largest undeveloped gold deposits in the world. The Company s management team recognizes the significance and value of the resource at Maoling and as such will continue to pursue a development strategy for Maoling. Tonnes (millions) Grade (Au g/t) Maoling Resources* Contained Gold (million ozs) Zone 1 Measured & Indicated Resource** Total Zone 1 and 4 Inferred Resource Maoling Reserves* Tonnes (millions) Grade (Au g/t) Contained Gold (million ozs) Zone 1 Pre Feasibility Probable Reserves * National Instruments compliant ** Measured & Indicated Resource includes Measured Resource of 4 million tones grading 1.31 g/t The Maoling project was earmarked by the Chinese government for development and foreign investment as early as 1994, when the State Council approved a report identifying it as one of 10 deposits to be made available for international participation. Maoling was again presented as one of 16 alternative exploration districts to be opened to foreign investors by the Ministry of Land and Resources at the 1999 China Mining Conference in Dalian city. Encouraged by these invitations to participate in the project together with the national policy of opening up mineral Page 2 of 15

4 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 resource development to foreign funded companies, Mundoro conducted a project assessment and began partnership discussions with a company controlled on behalf of the provincial government of Liaoning by the Geological and Exploration Bureau, Liaoning Aidi Resources Company Ltd. ( Aidi ). The formal co operative joint venture ( JV ) agreement, where Mundoro has rights to a 79% interest in the JV and Aidi has a 21% interest, was finalized in 2001, resulting in the formation of Tianli to manage the project. The exploration license for the project, covering an area of approximately 20 square kilometers, was transferred to Tianli in Licensing and Government Relations Tianli s business license was granted in August 2001 and the exploration license was transferred to Tianli on April Tianli s business license was not renewed on August 31, Tianli's exploration license for Maoling expired on November 5, 2005, and was not capable of being renewed because Tianli did not have a renewed business license. In August 2007, March 2010 and July 2010, Mundoro received correspondence from Aidi, who suggested both parties should discuss the termination of the TJV. The Company responded to Aidi in September 2007 and March 2010 and provided reasons why Mundoro does not believe it is appropriate to terminate the joint venture or liquidate TJV as well as requesting both parties work to renew Tianli s business license. Mundoro is in the process of responding to the July 2010 correspondence from Aidi. Mundoro Mining is in communication with the appropriate government authorities for the renewal of these licenses. Mundoro has conveyed the economic and environmental merits of Maoling to various levels of the provincial and national governments in China. From the Canadian perspective, Mundoro has communicated with the Canadian Embassy in Beijing and the Canadian government in Ottawa to seek their assistance in communicating with the Chinese government regarding Tianli s business license and exploration license. The Company is continuing its efforts to obtain Tianli s business and exploration licenses for Maoling; however, there are no assurances that it will be successful. Recent Technical and Environmental Work In January 2008, Ausenco provided a draft interim report to the Company on the status of the feasibility study which remains incomplete. Because of the delays in the renewal of Tianli s business license, certain portions of the feasibility study, such as geotechnical drilling for the final pit slope design in Zone 1 and final Chinese cost estimations, cannot be completed at this stage. It is anticipated that once Tianli s business license is renewed, the remaining engineering work needed to produce a NI compliant feasibility study and a full ESIA for Maoling will be completed. In May 2009 a further report titled A Technical Evaluation Study on Production Process of the Maoling Gold Project was issued by Guojie Senior Professors Science and Technology Consultation and Development Academy, Department of Environmental Science and Engineering, Tsinghua University in Beijing indicating Maoling can be developed as per the feasibility study and treated in China as an example of an eco industrial system for the gold industry. In the fourth quarter of 2009 Mundoro completed three key reports: (i) a report by Ausenco on the use of revised processing plant circuit from that of the 2005 Pre Feasibility Study to now use a combination processing circuit of gravity, flotation and Carbon in Leach ( CIL ) for the Maoling ore; and (ii) a report by Golder to provide revised tailings storage facility design from that of the 2005 Pre Feasibility Study as a result of the revised processing plant circuit; and in January 2010 (iii) a report by Golder and three Chinese design institutes on the environmental considerations for mine development in the Maoling area and how that pertains to Chinese government mining and environmental regulations. Community Relations With the support of the Gaizhou County government (which is under the City of Yingkou and is the closest town to Maoling), Mundoro implemented a community relations program to spend RMB 1.2 million (US$160,000) over a three year period to fund educational, health and sanitation development in Gaizhou County. From the community relations program, Mundoro has contributed approximately RMB 750,000 to the community for the upgrade of the Kuangdonggou Medical Clinic and educational contributions to the middle school in the form of computers, equipment and supplies. Construction is ongoing on two water ponds to supply irrigable water to satisfy the needs of the area farmers. The remaining RMB 450,000 will be contributed by the end of September Page 3 of 15

5 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and FINANCIAL HIGHLIGHTS The Company s loss for the second quarter of 2010 was $162,633 ($0.004 per share) as compared to a loss of $1,297,437 ($0.034 per share) for the second quarter in The loss for the second quarter of 2010 was principally attributable to the following: Expenditures for Maoling project management activities of $68,608, as compared to $93,899 in the second quarter of 2009 Expenditures for corporate expenses of $436,746, as compared to $617,711 in the second quarter of2009 Foreign exchange gain of $(269,156), as compared to a foreign exchange loss of $350,419 in the second quarter of 2009 Stock based compensation recovery of $(68,806), as compared to expenditures of $238,935 in the second quarter of 2009 The Company s loss for the six months ended June 30, 2010 was $1,004,399 ($0.026 per share) as compared to a loss of $1,870,094 ($0.049 per share) for the corresponding six month period in The 2010 loss was principally attributable to the following: Expenditures for Maoling project management activities of $233,708, as compared to $161,514 for corresponding six month period in 2009 Expenditures for corporate expenses of $1,007,037, as compared to $1,072,625 for the corresponding six month period in 2009 Foreign exchange gain of $(171,385), as compared to a foreign exchange loss of $201,193 for the corresponding six month period in 2009 Stock based compensation of $(61,601), as compared to $469,279 for the corresponding six month period in 2009 Interest income of $10,609, as compared to $40,159 for the corresponding six month period in 2009 The Company ended the second quarter of 2010 with $10,560,531 of cash and cash equivalents and no debt. 5. SUMMARY OF QUARTERLY RESULTS The following quarterly information is prepared in accordance with Canadian GAAP. The Company s measurement or functional currency is the Canadian dollar and its reporting currency is the U.S. dollar. US$000 s, except per share data Q2/10 Q1/10 Q4/09 Q3/09 Q2/09 (3) Q1/09 (3) Q4/08 Q3/08 Interest income $7 $4 $5 $5 $6 $34 $65 $88 Project management costs Corporate expenses (1) Other expenses (income) (2) (336) 107 1, ,490 (2,859) Income (loss) for the period (163) (842) (1,934) (922) (1,298) (573) (3,828) 2,470 Income (loss) per share, basic and fully diluted $(0.01) $(0.02) $(0.05) $(0.02) $(0.03) $(0.01) $(0.10) $0.06 (1) Corporate Expenses include accounting and audit, corporate development, corporate governance, government and community relations, corporate communication and marketing, and general and administrative expenses. (2) Other Expenses include stock based compensation, amortization and foreign exchange loss (gain). (3) During 2009, the Company restated the financial statements for the three months ended March 31, 2009 and the six months ended June 30, 2009 to be consistent with the method of foreign currency translation used for consolidation in periods prior to January The primary factors that cause fluctuations in the Company s quarterly results include, (i) the timing of stock option grants, (ii) mark to market adjustments on restricted share units and (iii) foreign exchange gains or losses that principally result from Canadian dollar exchange rate fluctuations when translating the Company s U.S. dollar Page 4 of 15

6 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 denominated cash balances into its Canadian dollar functional currency, together with some effects from evaluation of exchange rate of RMB Chinese currency over U.S. dollar. 6. RESULT OF OPERATIONS Quarter Ended June 30, 2010 compared to the Quarter Ended June 30, 2009 The Company s loss for the quarter ended June 30, 2010 was $162,633 ($0.004 per share), a decrease of $1,134,804 when compared to the loss for the quarter ended June 30, 2009 of $1,297,437 ($0.034 per share). The decrease in loss for 2010 is primarily due to the following: The Company s corporate expenses for the current quarter were $436,746, a decrease of $180,965 when compared to the second quarter of The decrease in 2010 principally resulted from higher corporate governance expenditures in 2009 for legal services relating to the Company s RSU and stock option plans and higher liability insurance premiums. In addition, corporate development expenditures were significantly higher in 2009 as a result of due diligence costs relating to a potential partner for the Maoling project. The Company incurred a foreign exchange gain of $269,156 in the second quarter of 2010 as compared to a foreign exchange loss of $350,419 for the second quarter of The increase in foreign exchange gain in 2010 principally results from a weakening of the Canadian dollar relative to the U.S. dollar during the second quarter of 2010 and its effect on the translation of U.S. dollar cash balances into the Canadian dollar functional currency. During the second quarter of 2009, the Canadian dollar strengthened relative to the U.S. dollar resulting in a foreign exchange loss. Stock based compensation in 2010 decreased by $307,742 to $(68,807) due to mark to market adjustments on restricted share units. The Company s share price decreased during the first quarter of 2010 from C$1.02 at March 31, 2010 to C$0.72 at June 30, 2010, whereas the share price increased from C$0.44 at March 31, 2009 to C$0.63 at June 30, Six Months Ended June 30, 2010 compared to the Six Months Ended June 30, 2009 The Company s loss for six months ended June 30, 2010 was $1,004,399 ($0.026 per share), a decrease of $865,695 when compared to the loss for the six months ended June 30, 2009 of $1,870,094 ($0.049 per share). The decrease in loss in 2010 is primarily due to the following: Project management costs at Maoling increased by $72,194 to $233,708 for the six months ended June 30, The increase results from costs incurred for water protection studies finalized by Golder in the first quarter of 2010 and travel expenses to meet with government authorities and project consultants in China. The Company incurred a foreign exchange gain of $171,385 for the six months ended June 30, 2010 as compared to a foreign exchange loss of $201,193 for the comparable six month period in The increase in foreign exchange gain in 2010 principally results from a weakening of the Canadian dollar relative to the U.S. dollar during the six months ended June 30, 2010 and its effect on the translation of U.S. dollar cash balances into the Canadian dollar functional currency. During the six months ended June 30, 2009, the Canadian dollar strengthened relative to the U.S. dollar resulting in a foreign exchange loss. Stock based compensation decreased during the six months ended 2010 by $530,880 to $(61,601) due to mark to market adjustments on restricted share units. The Company s share price decreased during 2010 from C$1.23 at December 31, 2009 to C$0.72 at June 30, 2010, whereas the share price increased from C$0.26 at December 31, 2008 to C$0.63 at June 30, Page 5 of 15

7 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and Feasibility Study and ESIA Activities The Feasibility Study commenced in December 2005 and has to date accumulated costs of $3,517,640 under Ausenco s supervision as project manager. The Environmental & Social Impact Assessment Study has to date accumulated costs of $1,552,051. The feasibility study has been essentially completed, and it is anticipated that once Tianli s business license is renewed, the remaining engineering work needed to produce a NI compliant feasibility study and a full ESIA for Maoling will be completed. 8. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company s principal source of liquidity as at June 30, 2010 was cash and cash equivalents totaling $10,560,531 (December 31, 2009 $12,134,801). The Company believes it has sufficient funds to cover current commitments such as completion of a feasibility study and a full ESIA for the development of Maoling upon renewal of Tianli s business license. Additional funds would be required to complete construction at Maoling. When required, the Company will explore appropriate financing routes which may include any one of, or combination of: issuance of share capital, funding through strategic partnership, project debt, convertible securities or other financial instruments. When considering new project acquisitions, joint ventures or project investments, the Company will carefully consider the implications of such investments against the Company s need for cash to sustain current activity. Although the intent would be to plan and arrange the necessary project debt financing to build a mine at Maoling, there is no assurance that all of the required debt and equity financing can be raised. Certain of these financing sources may be with recourse to the Company. Decisions with respect to financing alternatives will be made at the time of a new project acquisition or at time of production decision for Maoling. With the exception of interest earned on investments, the Company does not have revenue and relies upon equity financings to fund its ongoing business operations. 9. SHARE CAPITAL As of August 10, 2010, the Company had one class of common shares issued and 38,340,301 shares outstanding. In addition, the Company had 1,840,451 stock options outstanding and exercisable at prices ranging from $0.49 to $ OFF BALANCE SHEET ARRANGEMENTS There are no off balance sheet arrangements for the Company. 11. USE OF FINANCIAL INSTRUMENTS The Company is not in a situation where it needs to enter into any specialized financial agreements to minimize its investment risk, currency risk or commodity risk. The principal financial instruments affecting the Company s financial condition and results of operations are currently its cash. The Company is exposed to insignificant interest rate risk with respect to its cash, cash equivalents and accounts receivable given extremely low market interest rates. A majority of cash and cash equivalents have been placed with a Canadian Chartered Bank. Other accounts receivable represent amounts owing from government agencies and related parties. The Company does not hold any asset backed commercial paper. Page 6 of 15

8 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and CRITICAL ACCOUNTING ESTIMATES A detailed summary of all the Company s significant accounting policies is included in Note 2 to the audited Consolidated Financial Statements for December 31, The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the amount of revenues and expenses reported during the year. Significant areas requiring the use of management estimates include the collectability of accounts receivable, the fair value of financial instruments, the rates of amortization, the determination of environmental and asset retirement obligations, the impairment in value of resource properties, amounts of accrued liabilities, valuation allowance for future tax assets and determination of the variables used to calculate stock based compensation. While management believes determining the variables used are reasonable, actual results could differ from those estimates and could impact future results of operations and cash flows. 13. CONTRACTUAL OBLIGATIONS The Company s only contractual obligations consist of operating lease commitments for office space in Beijing and Vancouver and are summarized as follows: Less than 1 year 1 3 years 4 5 years After 5 years Total Operating leases $27,357 $121,298 $45,764 $194, INTERNATIONAL FINANCIAL REPORTING STANDARDS ( IFRS ) In January 2006, the Canadian Accounting Standards Board adopted a strategic plan, which includes the decision to move financial reporting for Canadian publicly accountable enterprises to a single set of globally accepted high quality standards, namely, International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board. The effective implementation date of the conversion from Canadian generally accepted accounting principles ( Canadian GAAP ) to IFRS is January 1, 2011, with an effective transition date of January 1, 2010 for financial statements prepared on a comparative basis. The Company is engaged in an assessment and conversion process which includes consultation with external consulting firms and expects to be ready for the conversion to IFRS in advance of January 1, The Company s approach to the conversion to IFRS includes three phases. Phase one, an initial general diagnostic of its accounting policies and Canadian GAAP relevant to its financial reporting requirements to determine the key differences and options with respect to acceptable accounting standards under IFRS, was completed in Phase two, an in depth analysis of the impact of those areas identified under phase one is expected to be completed in the third quarter of Phase three, the implementation of the conversion process, through the preparation of the opening balance sheet as at January 1, 2010, will be carried out in the fourth quarter of At this point, the Company s IT, accounting and financial reporting systems are not expected to be significantly impacted. Further, the Company has in place internal and disclosure control procedures to ensure continued effectiveness during this transition period. Page 7 of 15

9 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 Based on the review undertaken under Phase One and the work completed to date under Phase Two, the Company believes that IFRS will have limited impact on its current financial position. At the same time, IFRS will likely require more extensive disclosure and analysis of balances and transactions in the notes to the financial statements. The specific accounting areas the Company has focused its analysis on are outlined below together with the more salient issues under each area. Key Area Property plant and equipment Canadian GAAP (applied by the Company) PP&E is recorded at historical cost IFRS PP&E can be recorded using the cost (on transition to IFRS, the then fair value can be deemed to be the cost) or revaluation models Analysis and preliminary conclusions PP&E will likely continue to be recorded at their historical costs due to the complexity and resources required to determine fair values on an annual basis Mineral properties Stock based compensation Depreciation is based on their useful lives after due estimation of their residual values Exploration, evaluation and development costs are expensed when incurred Stock based compensation for equity settled awards is determined on the grant date, using fair value model of Black Scholes, and is recognized on a straight line basis on the vesting date. Stock based compensation for cash settled awards is measured at each reporting date and at the settlement date, using intrinsic model. Depreciation must be based on the useful lives of each significant component within PP&E IFRS has limited guidance with respect to these costs and currently allows exploration and evaluation costs to be either capitalized or expensed Stock based compensation for equity settled and cashsettled awards is determined by the same valuation models. However, for equity settled awards, stock based compensation of IFRS is recognized on graded method over the vesting period. For cash settled awards, upon settlement, it is adjusted to the value actually realized (intrinsic model) same as Canadian GAAP. Based on an analysis of PP&E s significant components and their useful lives, it is unlikely that changes to their useful lives and, therefore, depreciation rates and expenses, will be required The existing accounting policy is likely to be maintained Stock based compensation for equity settled awards will likely be recalculated and shown as a difference in the opening balance on conversion to IFRS. Page 8 of 15

10 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 The above comments should not be considered as a complete list of changes that will result from the transition to IFRS as the Company s analysis is still in progress and no final determinations have been made where choices of accounting policies are available. In addition, the accounting bodies responsible for issuing Canadian and IFRS accounting standards have significant ongoing projects that could impact the Company s financial statements as at January 1, 2011 and in subsequent years, including projects regarding income taxes, financial instruments and joint venture accounting. In addition, there is an extractive industries project currently underway that will lead to more definitive guidance on the accounting for exploration and evaluation expenditures, but this is still in the discussion paper stage and may not be completed for some time. The Company is continuing to monitor the development of these projects and will assess their impact in the course of its transition process to IFRS. 15. Business Combinations In January 2009, the CICA issued Handbook Section 1582, Business Combinations, Section 1601, Consolidations, and Section 1602, Non controlling Interests. These sections replace the former CICA Handbook Section 1581, Business Combinations and Section 1600, Consolidated Financial Statements and establish a new section for accounting for a non controlling interest in a subsidiary. Sections 1582 and 1602 will require net assets, non controlling interests and goodwill acquired in a business combination to be recorded at fair value and non controlling interests will be reported as a component of equity. In addition, the definition of a business is expanded and is described as an integrated set of activities and assets that are capable of being managed to provide a return to investors or economic benefits to owners. Acquisition costs are not part of the consideration and are to be expensed when incurred. Section 1601 establishes standards for the preparation of consolidated financial statements. These new sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, Earlier adoption of these sections is permitted as of the beginning of a fiscal year. All three sections must be adopted concurrently. The Company is currently evaluating the impact of the adoption of these sections. 16. DISCLOSURE CONTROLS AND PROCEDURES UPDATE Disclosure controls and procedures have been designed to ensure that information required to be disclosed by Mundoro is accumulated and communicated to the management as appropriate to allow timely decisions regarding required disclosure. The Company has concluded, based on its evaluation as of the end of the period, the disclosure controls and procedures are effective to provide reasonable assurance that material information related to Mundoro, including the consolidated subsidiaries, is made known to them by others within both entities. It should be noted that while the Company believes that the disclosure controls and procedures provide a reasonable level of assurance and that they are effective, it does not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Page 9 of 15

11 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and INTERNAL CONTROLS OVER FINANCIAL REPORTING The Company is responsible for designing internal controls over financial reporting or causing them to be designed under the supervision of the CEO and CFO in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Company has assessed the design of the internal control over financial reporting and during this process the Company identified certain weaknesses in internal controls over financial reporting which are as follows: Due to the limited number of staff at the Company, it is not feasible to achieve complete segregation of incompatible duties. Due to the size of the Company and the limited number of staff, the Company does not have the optimum complement of personnel with all the technical accounting knowledge to address all complex and nonroutine accounting transactions that may arise. Hence the Company hires external accounting firms to assist in the completion of such transactions. These weaknesses in the Company s internal controls over financial reporting may result in a more than remote likelihood that a material misstatement would not be prevented or detected. Management and the board of directors work to mitigate the risk of a material misstatement in financial reporting; however, there can be no assurance that this risk can be reduced to less than a remote likelihood of a material misstatement. 18. RISKS AND UNCERTAINTIES An investment in the securities of the Company is speculative due to the nature of the Company s business and the present stage of exploration and development of its mineral properties. Risk factors relating to the Company could materially affect the Company s future results and could cause them to differ materially from estimates described in forward looking statements made by the Company. Prospective investors should carefully consider these risk factors along with the other matters set out or incorporated by reference in the Annual Information Form which has been filed on the SEDAR website at and include but are not limited to: Mundoro Capital has no history of operations and there can be no assurance that it will be successful or profitable. While members of management have relevant investment experience, there can be no assurance that Mundoro Capital s business will be successful or profitable or that Mundoro Capital will be able to successfully execute its business model and growth strategy. If Mundoro Capital cannot execute its business model and growth strategy, it may result in a material and adverse effect on Mundoro Capital s profitability, results of operation and financial conditions. The Company has never paid a dividend on its common shares and does not expect to do so in the foreseeable future. The Company may be unsuccessful in obtaining permits and licenses in a timely manner for any mineral property in which Mundoro Capital is in the process of evaluating as a strategic investment and/or holds an interest directly or indirectly in an exploring, developing and/or operating mineral property now or in the future. Exploration, development and operation of a mineral property are subject to laws and regulations governing health and worker safety, employment standards, environmental matters, mine development, project development, mineral production, permitting and maintenance of title, exports, taxes, labour standards, reclamation obligations, heritage and historic matters and other matters. The Company is required to have a wide variety of permits from government and regulatory authorities to carry out its activities. These permits relate to virtually every aspect of the Company s exploration and exploitation activities. The owners and operators of the properties in which Mundoro Capital holds an interest require licenses and permits from various governmental authorities in order to conduct their operations. Future changes in such licenses and permits could have a material adverse impact on the revenue Mundoro Capital derives. Such licenses and permits are subject to change in various circumstances and are required to be kept in good standing through a variety of means, including cash payments and satisfaction of conditions of issue. There can be no guarantee that Mundoro Capital or the operators of those properties in which Mundoro Capital holds an interest, will Page 10 of 15

12 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 be able to obtain or maintain all necessary licenses and permits in good standing that may be required to explore, develop and operate the properties, commence construction or operation of mining operations that economically justify the cost. Any failure to comply with applicable laws and regulations, permits and licenses, or to maintain permits and licenses in good standing, even if inadvertent, could result in interruption or closure of exploration, development or mining operations or fines, penalties or other liabilities accruing to the owner or operator of the project. Any such occurrence could substantially decrease production or cause the termination of operations on the property, and thereby have a material and adverse effect on Mundoro Capital s profitability, results of operation and financial condition. Any mineral property in which Mundoro Capital holds an interest directly or indirectly, now or in the future, may be subject to unforeseen and unknown title defects. A defect in the chain of title to any of the underlying properties in which Mundoro Capital may have an interest may arise to defeat the claim of the operator to a property. To the extent an owner or operator is not entitled to title on the property, it may be required to cease operations or transfer operational control to another party. As a result, known title defects, as well as unforeseen and unknown title defects may impact operations at a project in which Mundoro Capital has an interest and may result in a material and adverse effect on Mundoro Capital s profitability, results of operation and financial condition. Any mineral property in which Mundoro Capital holds an interest directly or indirectly, now or in the future, may be exposed to risks of changing political attitudes and stability and ensuing changes in government regulation in the countries in which it holds its interests. The properties in which Mundoro Capital or its affiliates may hold an interest may be located in multiple legal jurisdictions and political systems. There is sovereign risk in investing in foreign countries, including the risk that the resource concessions may be susceptible to revision or cancellation by new laws or changes in direction by the government in question. It is possible that changes in applicable laws, regulations, or changes in their enforcement or regulatory interpretation could result in adverse changes to mineral operations. These are matters over which Mundoro Capital has no control. There is no assurance that future political and economic conditions in such countries will not result in the adoption of different policies or attitudes respecting the development and ownership of resources. Any such changes in policy or attitudes may result in changes in laws affecting ownership of assets, land tenure and resource concessions, taxation, royalties, rates of exchange, environmental protection, labour relations, repatriation of income and return of capital, which may affect both the ability to undertake exploration and development on the properties on which Mundoro Capital holds royalty or other interests. In certain areas in which Mundoro Capital has an interest, the regulatory environment is in a state of continuing change, and new laws, regulations and requirements may be retroactive in their effect and implementation. Any changes in governmental laws, regulations, economic conditions or shifts in political attitudes or stability are beyond the control of Mundoro Capital and such changes may result in a material and adverse effect on Mundoro Capital s profitability, results of operation and financial condition. Any mineral property in which Mundoro Capital holds an interest directly or indirectly, now or in the future, may be subject to hazards and risks beyond the control of Mundoro Capital. In the course of exploration, development and production of mineral properties, certain risks, and in particular, unexpected or unusual geological operating conditions including rock bursts, cave ins, flooding and earthquakes may occur. It is not always possible to fully insure against such risks and Mundoro Capital may decide not to take out insurance against such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the securities of Mundoro Capital. Page 11 of 15

13 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 Any mineral property in which Mundoro Capital holds an interest directly or indirectly, now or in the future, may be subject to changes in environmental laws and regulations that may adversely affect those operations. Environmental laws and regulations may affect the operations of Mundoro Capital. Mundoro Capital minimizes these risks by complying with all applicable and international environmental, health and safety standards and regulations. Environmental legislation may change and make the mining and processing of ore uneconomic or result in significant environmental or reclamation costs. Changes in these laws and regulations or changes in their enforcement or interpretation could result in changes in legal requirements or in the terms of the Company s permits that could have a significant adverse impact on the Company s existing or future operations or projects. In addition, certain types of operations require the submission of environmental impact statements and approval by government authorities. Environmental legislation is evolving towards stricter standards, increased fines and penalties for non compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their directors, officers and employees. Permits from a variety of regulatory authorities are required for many aspects of mineral exploitation activities, including closure and reclamation. Future environmental legislation could cause additional expense, capital expenditures, restrictions, liabilities and delays in the development of the Company s properties, the extent of which cannot be predicted. The Company s business may be affected by amendments or changes to environmental laws, regulations and requirements in the host country. At any time, a number of draft environmental laws may be proposed. It is not possible to predict when or if a draft environmental bill will be enacted into law or what the final provisions of such law will be, if enacted. It is possible that the host country government will issue further decrees or otherwise attempt to modify existing environmental rights or other laws affecting the Company, its properties and its ability to operate in the host country. Any changes to host country environmental law may adversely affect the Company s ability to develop and operate its properties in the host country. Globally, environmental legislation is evolving towards stricter standards and enforcement, more stringent environmental impact assessments of new mining projects and increasing liability exposure for companies and their directors and officers. There is no assurance that future environmental regulations will not adversely affect Mundoro Capital s operations. Mundoro Capital s Shares may experience price volatility. In recent years, the securities markets have experienced a high level of price and volume volatility, and the market prices of securities of many companies have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continual fluctuations in price will not occur. It may be anticipated that any quoted market for the common shares will be subject to market trends generally, notwithstanding any potential success of Mundoro Capital in creating revenues, cash flows or earnings. The value of Mundoro Capital s common shares will be affected by such volatility. Changes in the market price of commodities will affect the profitability of Mundoro Capital. Mundoro Capital s revenues, if any, are expected to be in large part derived from the sale of natural resource assets. The price of natural resource assets fluctuates widely and is affected by factors beyond the control of Mundoro Capital including, but not limited to, international economic and political trends, currency exchange fluctuations, economic inflation and expectations for the level of economic inflation in the consuming economies, interest rates, global and local economic health and trends, speculative activities and changes in the supply of precious metals due to new mine developments, mine closures as well as advances in various production and use technologies of precious metals. All of these factors will have impacts on the viability of Mundoro Capital s exploration projects that are impossible to predict. Page 12 of 15

14 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 Mundoro Capital s financials may be subject to variations in currency and foreign exchange rates. It is anticipated that Mundoro Capital s resource investments will be made in Canadian and US dollars and Mundoro Capital may also make resource investments denominated in other foreign currencies. Therefore, changes in currency exchange rates as well as associated transaction costs could adversely affect the value of the Company s resource investments during any period. In addition, the Company could also make investments in jurisdictions which may place restrictions on the repatriation of funds. The Company does not anticipate entering into hedging or derivative arrangements to manage its foreign exchange risk. Increased competition for resource investments could adversely effect Mundoro Capital s ability to acquire additional resource investments. The mining industry is competitive with many companies competing for the limited number of precious metal acquisition and exploration opportunities that are economic under current and foreseeable metals prices, as well as for available investment funds. With metal prices at their current levels, activity in the industry has increased dramatically. Many companies are engaged in the search for and the acquisition of mineral interests, and there is a limited supply of desirable mineral interests. The mineral exploration and mining business are competitive in all phases. Mundoro Capital may be at a competitive disadvantage in acquiring interests, whether by way of investment or otherwise, as many competitors have greater financial resources and technical staff. Accordingly, there can be no assurance that Mundoro Capital will be able to compete successfully against other companies in acquiring new mineral properties. Mundoro Capital s inability to acquire additional investments in mineral properties may result in a material and adverse effect on Mundoro Capital s profitability, results in operation and financial condition. Mundoro Capital may experience difficulty attracting and retaining qualified management and technical personnel to efficiently operate its business. The success of Mundoro Capital will be largely dependent on the performance of its management team. The loss of the services of these persons could have a materially adverse effect on Mundoro Capital s business and prospects. There is no assurance Mundoro Capital can retain the services of its officers or other qualified personnel required to operate its business. There can be no assurance that Mundoro Capital will be able to obtain sufficient financing in the future to execute its business plan. Mundoro Capital has limited financial resources, has no source of operating income and has no assurance that additional funding will be available to it for further exploration and development of its projects. There can be no assurance that Mundoro Capital will be able to obtain adequate financing in the future or that the terms of such financing will be favorable. Failure to obtain such additional financing could result in delay or indefinite postponement of further business activities and may result in a material adverse effect on Mundoro Capital s profitability, results of operation and financial condition. Mundoro Capital will require new capital to grow its business and there are no assurances that capital will be available when needed, if at all. It is likely that such additional capital will be raised through the issuance of additional equity, which will result in dilution to Mundoro Capital s shareholders. Certain of Mundoro Capital s directors serve in similar positions with other public companies, which might put them in a conflict position from time to time. Certain of the directors of Mundoro Capital also serve as directors or officers, or have significant shareholdings in, other companies involved in mineral property investments and, to the extent that such other companies may participate in ventures which Mundoro Capital may participate in, a conflict may arise. In all cases where directors and officers have an interest in other companies, such other companies may also compete with Mundoro Capital for the acquisition of mineral property investments. Such conflicts of the directors and officers may result in a material and adverse effect on Mundoro Capital s profitability, results of operation and financial condition. Page 13 of 15

15 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and 2009 Any mineral property in which Mundoro Capital holds an interest directly or indirectly, now or in the future is subject to reserves and resources estimates based on interpretation and assumption and actual production may differ from amounts identified in such estimates. The mineral reserves and resources identified on properties are estimates only, and no assurance can be given that the estimated reserves and resources are accurate or that the indicated level of minerals will be produced. Such estimates are, in large part, based on interpretations of geological data obtained from drill holes and other sampling techniques. Actual mineralization or formations may be different from those predicted. Further, it may take many years from the initial phase of drilling before production is possible, and during that time the economic feasibility of exploiting a discovery may change. Resource estimates in particular must be considered with caution. Resource estimates for properties that have not commenced production are based, in many instances, on limited and widely spaced drill holes or other limited information, which is not necessarily indicative of the conditions between and around drill holes. Accordingly, such resource estimates may require revision as more drilling or other exploration information becomes available or as actual production experience is gained. Further, resources may not have demonstrated economic viability and may never be extracted by the operator of a property. It should not be assumed that any part or all of the mineral resources on properties constitute or will be converted into reserves. Market price fluctuations of the applicable commodity, as well as increased production and capital costs or reduced recovery rates, may render the proven and probable reserves on properties unprofitable to develop at a particular site or sites for periods of time or may render reserves containing relatively lower grade mineralization uneconomic. Moreover, short term operating factors relating to the reserves, such as the need for the orderly development of orebodies or the processing of new or different ore grades, may cause reserves to be reduced or not extracted. Estimated reserves may have to be recalculated based on actual production experience. Any of these factors may require the operators to reduce their reserves and resources, which may result in a material and adverse effect on Mundoro Capital s profitability, results of operation and financial condition. Any mineral property in which Mundoro Capital holds an interest directly or indirectly, now or in the future, may be subject to potential litigation. Potential litigation may arise with respect to a property in which Mundoro Capital is in the process of evaluating as a strategic investment and/or holds an interest directly or indirectly in an exploring, developing and/or operating mineral property now or in the future (for example, litigation between joint venture partners or original property owners). Mundoro Capital might not generally have any influence on the litigation nor will it necessarily have access to data. To the extent that litigation results in the cessation or reduction of production from a property (whether temporary or permanent), it could have a material and adverse effect on Mundoro Capital s profitability, results of operations and financial condition. Mundoro Mining Inc. s joint venture partner, Aidi, could be successful in its efforts to force the termination and liquidation of the Tianli Joint Venture, which holds the Maoling project mineral property rights. Although the Tianli Joint Venture agreement requires the consent of both joint venture partners to terminate and liquidate the Tianli Joint Venture, the agreement also has a dispute resolution provision whereby the other joint venture partner, under certain conditions, could require the issue of termination and liquidation of the Tianli Joint Venture to be decided in arbitration. The value of Mundoro Capital s common shares may be affected should the Tianli Joint Venture be terminated and liquidated. Other risk factors include issues relating to: results of prior exploration work; estimates of reserves and resources; economics of mine development; uninsurable risks; gold sales; currency repatriation and conversion; industry competition for resource investments and experienced management professionals; management performance and succession; price volatility of publicly traded securities; and the residency of directors and others. Page 14 of 15

16 Management s Discussion and Analysis For The Six Months Ending June 30, 2010 and FORWARD LOOKING STATEMENTS Forward looking statements look into the future and provide an opinion as to the effect of certain events and trends on the business. Forward looking statements may include words such as plans, intends, anticipates, should, estimates, expects, believes, indicates, suggests and similar expressions. This management s discussion and analysis ( MD&A ) and in particular the Outlook section, contains forward looking statements. These forward looking statements are based on current expectations and various estimates, factors and assumptions and involve known and unknown risks, uncertainties and other factors. It is important to note that: Unless otherwise indicated, forward looking statements in this MD&A describe the Company s expectations as of August 4, Readers are cautioned not to place undue reliance on these statements as the Company s actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied by such forward looking statements if known or unknown risks, uncertainties or other factors affect the Company s business, or if the Company s estimates or assumptions prove inaccurate. Therefore, the Company cannot provide any assurance that forward looking statements will materialize. Subject to applicable laws, the Company assumes no obligation to update or revise any forward looking statement, whether as a result of new information, future events or any other reason. The material assumptions that were applied in making the forward looking statements in this MD&A include: expectations as to the Company s future strategy and business plan; and execution of the Company s existing plans, which may change due to changes in the views of the Company or if new information arises which makes it prudent to change such plans. For a description of material factors that could cause the Company s actual results to differ materially from the forwardlooking statements in this MD&A, please see Risks and Uncertainties. 20. QUALIFIED PERSONS & INFORMATION CONCERNING ESTIMATES OF RESOURCES The Pre Feasibility Study ( PFS ) described herein was prepared to broadly quantify the Maoling Zone 1 deposit s capital and operating cost parameters, and to further the development of the project. It was not prepared for use as a valuation of the deposits, nor should it be considered to be a final feasibility study. The information contained in the PFS reflects various technical and economic conditions at the time of writing that can change significantly over relatively short periods of time. Reserves quoted were prepared by AMEC Americas Ltd. under the direction and oversight of Mr. Mark Pearson P.Eng. of Vancouver, BC, an Independent Qualified Person as defined by National Instrument Resource estimation for the Zone 1 area in 2006 was carried out in the Brisbane, Australia office of Golder Associates Pty Limited, an international earth sciences consulting group under the direction and oversight of Dr. Andrew Richmond, MAusIMM, an Independent Qualified Person as defined by NI The Zone 4 Resource Estimate (2001) was prepared by AMEC Americas and is reviewed in a technical report prepared by Peter Lewis, Ph.D., P.Geo,. NI compliant technical reports for the pre feasibility study and all reserve and resource estimates have been filed on the SEDAR website at This management discussion and analysis of financial results used the terms measured resources, indicated resources and inferred resources. The Company advises investors that although these terms are recognized and required by Canadian regulations (under National Instrument Standards of Disclosure for Mineral Projects), the U.S. Securities and Exchange Commission does not recognize them. Investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into reserves. In addition, inferred resources have a great amount of uncertainty as to their existence and economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or pre feasibility studies, or economic studies except for Preliminary Assessment as defined under Investors are cautioned not to assume that part or all of an inferred resource exists, or is economically or legally mineable. Mineral Resources that are not classified as mineral reserves do not have demonstrated economic viability. Page 15 of 15

17 Consolidated Financial Statements and Notes For the Fiscal Quarter Ended June 30, 2010 (Unaudited and expressed in United States Dollars except as noted otherwise)

18 Mundoro Capital Inc. INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2010 NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS Under National Instrument , Part 4, subsection 4.3 (3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying unaudited interim financial statements of the Company have been prepared by, and are the responsibility of, the Company s management. The Company s independent auditor has not performed a review of the these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an auditor. Page 1 of 1

19 MUNDORO CAPITAL INC. (an exploration stage company) Consolidated Balance Sheets (Unaudited) June 30, 2010 and December 31, 2009 (Expressed in United States Dollars) ASSETS June December Current assets Cash and cash equivalents $ 10,560,531 $ 12,134,801 Accounts receivable 61,258 35,453 Prepaid expenses and deposits 67,637 50,714 10,689,426 12,220,968 Mineral interests (Note 4) Equipment and vehicles (Note 5) 55,283 64,048 Total Assets $ 10,744,809 $ 12,285,116 LIABILITIES Current liabilities Accounts payable and accrued liabilities $ 145,477 $ 397,944 Compensation liabilities (Note 7) 107, , , ,617 Long term compensation liabilities (Note 7) 102,639 SHAREHOLDERS' EQUITY Share capital (Note 6) 35,873,603 35,873,603 Contributed surplus 7,470,954 7,470,954 Deficit (36,433,088) (35,428,689) Accumulated other comprehensive income (Note 12) 3,579,956 3,700,992 10,491,425 11,616,860 Total Liabilities and Shareholders' Equity $ 10,744,809 $ 12,285,116 ` Commitments (Note 8) Contingencies (Note 13) Segment information (Note 9) Subsequent event (Note 14) Approved by the Directors: "Patrick Downey" "Teo Dechev" Patrick Downey Teo Dechev

20 MUNDORO CAPITAL INC. (an exploration stage company) Consolidated Statements of Loss and Deficit (Unaudited) Six Months Ended June 30, 2010 and June 30, 2009 (Expressed in United States Dollars) 3 months ended 3 months ended 6 months ended 6 months ended June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009 Interest $ 6,511 $ 6,242 $ 10,609 $ 40,159 Mineral interest and project management costs 68,608 93, , ,514 Expenses Accounting and audit 55,455 50, ,486 78,334 Corporate communication and marketing 65,995 63, , ,600 Corporate development 85, , , ,209 Corporate governance 69, , , ,387 Government and community relations 87,909 70, , ,102 General and administrative 71,900 96, , , , ,711 1,007,037 1,072,625 Loss before other expenses (498,843) (705,368) (1,230,136) (1,193,980) Other expenses (income) Amortization 1,752 2,715 3,592 5,642 Foreign exchange loss (gain) (269,156) 350,419 (171,385) 201,193 Loss on disposal of equipment 3,657 Stock based compensation (Note 7) (68,806) 238,935 (61,601) 469,279 (336,210) 592,069 (225,737) 676,114 Loss for the period (162,633) (1,297,437) (1,004,399) (1,870,094) Deficit, beginning of period (36,270,455) (31,275,563) (35,428,689) (30,702,906) Deficit, end of period $ (36,433,088) $ (32,573,000) $ (36,433,088) $ (32,573,000) Basic and diluted loss per share $ (0.004) $ (0.034) $ (0.026) $ (0.049) Weighted average shares outstanding 38,340,301 38,340,301 38,340,301 38,340,301